EXPLAINED: Why Austria's rising property prices are causing alarm
As property prices in Austria soar and people take on more debt to buy homes, the country's national bank has raised the alarm.
Over recent years, residential property prices in Austria have soared,
But there are increasing signs that prices are growing at an unsustainable rate and that's causing concern for Austria's National Bank (ÖNB), according to the lender's latest Financial Stability Report.
In the first three months of 2022, prices were up by 12.3 percent compared to the same period in 2021, and the trend continues upward both in Vienna and the rest of the country. At the same time, low-interest rates drive up loan volume and encourage investment opportunities in the market.
READ ALSO: EXPLAINED: How Austria’s new finance measures could benefit you
The lingering question, especially since the 2008 financial crisis, is whether or not Austria is creating a housing bubble - and will it burst?
“The systemic risks emanating from these dynamics in the residential real estate market have increased steadily over the past few years and now need to be addressed through supervisory action,” ÖNB Vice Governor Gottfried Haber explained.
What are the risks?
Real estate prices have risen much faster than household incomes for around ten years. Nonetheless, more and more people are taking out mortgages, particularly over the past year.
Austria's National Bank also mentioned that a large sum of mortgage loans was offered with conditions that leave little room for manoeuvre in case of unforeseen adverse developments, such as increasing cost of living or unemployment or interest rate increases.
READ ALSO: How has the coronavirus pandemic impacted Vienna’s property market?
According to the bank, half of the new recent loans in the country were granted with down payments of less than 20 percent - which they assess as a risk. Another risk factor is the high share of variable rate loans - meaning loans with fees that depend on changeable interest rates. If rates go up in Austria (for example, to counter rising inflation), it could leave borrowers vulnerable.
How much in trouble are we in then?
Several factors mitigate risks in Austria and make the situation less comparable to the housing bubble in the United States in the early 2000s.
The main thing is that Austria has a well-developed rental market with a high share of nonprofit providers. This means that many people, especially low and average income, are renters in the country.
Additionally, the high share of nonprofit providers (such as the state, in the case of a Gemeindebaum, or cooperatives, in a Genossenschaft) helps keep rental prices from soaring, maintaining people in rental properties for longer.
READ ALSO: Reader question: How does Vienna’s rent control system work?
"Moreover, Austrian borrowers tend to have high incomes and wealth by international standards", adds the ÖBN report, stating another significant difference between the US housing bubble crisis and the current situation in the alpine country.
Finally, Austrian banks are better capitalised, with high sums of provisions against bad loans to cushion possible default losses. This basically means that Austria's banks have enough cash and have saved up money to prevent significant impacts in case of people not paying back their loans.
Still, ÖNB says that, especially in times of crisis, the country's real estate market poses systemic risks that can jeopardise Austria's financial stability and should be addressed.
How will Austria address its problem?
The Austrian government is expected to unveil new mortgage rules next month, Der Standard reported.
Among the expected changes, borrowers will need to pay 20 percent of the loan amount from their own funds. In addition, the loan instalment must not exceed 40 percent of the net household income, and the loan term is to be limited to a maximum of 35 years.
READ ALSO: Property in Austria: Real estate in high demand in Tyrol
Austria's Financial Market Stability Board (FMSB) issued a recommendation for the implementation of such measures, calling them "borrower-based instruments".
The goal is to prevent potential losses in the banking sector and protect the economy, but also protect borrowers from taking on excessive debt.
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Over recent years, residential property prices in Austria have soared,
But there are increasing signs that prices are growing at an unsustainable rate and that's causing concern for Austria's National Bank (ÖNB), according to the lender's latest Financial Stability Report.
In the first three months of 2022, prices were up by 12.3 percent compared to the same period in 2021, and the trend continues upward both in Vienna and the rest of the country. At the same time, low-interest rates drive up loan volume and encourage investment opportunities in the market.
READ ALSO: EXPLAINED: How Austria’s new finance measures could benefit you
The lingering question, especially since the 2008 financial crisis, is whether or not Austria is creating a housing bubble - and will it burst?
“The systemic risks emanating from these dynamics in the residential real estate market have increased steadily over the past few years and now need to be addressed through supervisory action,” ÖNB Vice Governor Gottfried Haber explained.
What are the risks?
Real estate prices have risen much faster than household incomes for around ten years. Nonetheless, more and more people are taking out mortgages, particularly over the past year.
Austria's National Bank also mentioned that a large sum of mortgage loans was offered with conditions that leave little room for manoeuvre in case of unforeseen adverse developments, such as increasing cost of living or unemployment or interest rate increases.
READ ALSO: How has the coronavirus pandemic impacted Vienna’s property market?
According to the bank, half of the new recent loans in the country were granted with down payments of less than 20 percent - which they assess as a risk. Another risk factor is the high share of variable rate loans - meaning loans with fees that depend on changeable interest rates. If rates go up in Austria (for example, to counter rising inflation), it could leave borrowers vulnerable.
How much in trouble are we in then?
Several factors mitigate risks in Austria and make the situation less comparable to the housing bubble in the United States in the early 2000s.
The main thing is that Austria has a well-developed rental market with a high share of nonprofit providers. This means that many people, especially low and average income, are renters in the country.
Additionally, the high share of nonprofit providers (such as the state, in the case of a Gemeindebaum, or cooperatives, in a Genossenschaft) helps keep rental prices from soaring, maintaining people in rental properties for longer.
READ ALSO: Reader question: How does Vienna’s rent control system work?
"Moreover, Austrian borrowers tend to have high incomes and wealth by international standards", adds the ÖBN report, stating another significant difference between the US housing bubble crisis and the current situation in the alpine country.
Finally, Austrian banks are better capitalised, with high sums of provisions against bad loans to cushion possible default losses. This basically means that Austria's banks have enough cash and have saved up money to prevent significant impacts in case of people not paying back their loans.
Still, ÖNB says that, especially in times of crisis, the country's real estate market poses systemic risks that can jeopardise Austria's financial stability and should be addressed.
How will Austria address its problem?
The Austrian government is expected to unveil new mortgage rules next month, Der Standard reported.
Among the expected changes, borrowers will need to pay 20 percent of the loan amount from their own funds. In addition, the loan instalment must not exceed 40 percent of the net household income, and the loan term is to be limited to a maximum of 35 years.
READ ALSO: Property in Austria: Real estate in high demand in Tyrol
Austria's Financial Market Stability Board (FMSB) issued a recommendation for the implementation of such measures, calling them "borrower-based instruments".
The goal is to prevent potential losses in the banking sector and protect the economy, but also protect borrowers from taking on excessive debt.
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